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Recent literature questions the relative advantage of community banks vs. non-community banks in small business funding. Using the Federal Deposit Insurance Corporation’s definition of a community bank, the study re-examines the role of community banks in providing funding to small businesses using the Community Reinvestment Act (CRA) small business lending data over the period 2003 to 2016. The empirical results indicate that community banks are still providing 30 percent more small business funding than non-community banks, especially after the Great Recession. This role is even more important in those counties in non-metropolitan areas. In addition, the results indicate that in counties where community banks do not have offices, they provide 48 percent fewer loans compared to non-community banks in counties where they do not have offices, which suggests community banks still use physical offices to maintain their relationship lending advantage. Clearly, from a public policy standpoint, the results support the view that community banks are important because they continue to provide valuable services to small business firms throughout the country.

This paper studies the role of the Community Reinvestment Act (CRA) in the U.S. housing boom-bust cycle. I find that enhanced CRA enforcement in 1998 increased the growth rate of mortgage lending by CRA-regulated banks to CRA-eligible census tracts. I show that during the boom period house price growth was higher in the eligible census tracts because of the shift in mortgage supply of regulated banks. Consequently, these census tracts experienced a worse housing bust. I find that CRA-induced mortgages were awarded to borrowers with lower FICO scores and were more frequently delinquent.

In two short histories of the independence of the U.S. Federal Reserve Bank since its creation in 1913—the first with respect to the Fed's monetary policymaking, the second focused on its regulatory policymaking—the author shows that the range of the Fed's powers has varied greatly over time, and that changes in those powers have had major effects on the extent of Fed independence. Moreover, the shifts over time in Fed powers reflect, to a significant degree, conscious trade‐offs by Fed leaders. A large number of somewhat surprising Fed positions on important regulatory matters can be explained as more or less deliberate attempts to preserve the Fed's monetary powers from political interference by yielding some of its independence in exercising its regulatory authority. In a case involving one of the most destructive U.S. financial regulatory policies, the Fed's effective neutrality on, and thus failure to support, the elimination of restrictions on interstate branch banking is seen as contributing to the chronic instability of the U.S. banking system, which has suffered some 20 major crises since the early 1800s (as compared to the crisis‐free Canadian system, with its nationwide banking from its inception). The Fed's reluctance to intervene is attributed to its unwillingness to antagonize powerful Congressional supporters of state banking interests and, more generally, to a “game of bank bargains” that can be seen at work in the political economy of virtually all countries. In more recent times, the most costly episode in this time‐honored game features a series of implicit or, in some cases, explicit agreements between large U.S. banks and urban activist groups—under the aegis of the Community Reinvestment Act, and with the oversight and implicit blessing of the Fed—to make on the order of $4.6 trillion loans to “subprime” borrowers in exchange for the activists’ (and the Fed's) support in Congressional merger hearings. The resulting nationwide debasement of mortgage underwriting standards and sheer volume of “toxic assets,” in combination with clearly inadequate capital requirements (which the Fed also failed to correct), are viewed as if not the principal cause of the crisis, a far bigger contributor than, say, the Fed's widely criticized unwillingness to tighten monetary policy in the early 2000s. To prevent the Fed from continuing to sacrifice its independence in regulatory matters to preserve its freedom to conduct monetary policy, the author proposes that authority for regulatory and monetary policy be vested in two separate regulatory bodies. If carried out, such a policy change would enact a proposal made by then Treasury Secretary Hank Paulson in 2008, just before the global financial crisis hit.

We study the interaction of search and application approval in credit markets. We combine a unique dataset, which details search behavior for a large sample of mortgage borrowers, with loan application and rejection decisions. Our data reveal substantial dispersion in mortgage rates and search intensity, conditional on observables. However, in contrast to predictions of standard search models, we find a novel non-monotonic relationship between search and realized prices: borrowers, who search a lot, obtain more expensive mortgages than borrowers' with less frequent search. The evidence suggests that this occurs because lenders screen borrowers' creditworthiness, rejecting unworthy borrowers, which differentiates consumer credit markets from other search markets. Based on these insights, we build a model that combines search and screening in presence of asymmetric information. Risky borrowers internalize the probability that their application is rejected, and behave as if they had higher search costs. The model rationalizes the relationship between search, interest rates, defaults, and application rejections, and highlights the tight link between credit standards and pricing. We estimate the parameters of the model and study several counterfactuals. The model suggests that “overpayment” may be a poor proxy for consumer unsophistication since it partly represents rational search in presence of rejections. Moreover, the development of improved screening technologies from AI and big data (i.e., fintech lending) could endogenously lead to more severe adverse selection in credit markets. Finally, place based policies, such as the Community Reinvestment Act, may affect equilibrium prices through endogenous search responses rather than increased credit risk. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Drechsler, Savov, and Schnabl (2017) present a novel reformulation of the bank lending channel of monetary transmission based on market power in local deposits markets, which they term the deposits channel. In this paper we perform a successful narrow replication. We then further their study by reconciling their results on lending with two strands of related literature. First, recent studies have pointed out the unique dynamics of credit card loans in Community Reinvestment Act loan origination data. When accounting for this heterogeneity, we find some key results are sensitive to the inclusion of credit card banks. This confirms the importance of accounting for credit card loans when using CRA data. Second, we show that inconsistencies with related empirical studies can be explained by differences in market power measure, sample period, and the inclusion of alternative control variables. These results highlight that market power on opposing sides of bank balance sheets can impact monetary transmission through alternative channels.

In this paper, we use geographic and time variation of the Community Reinvestment Act (CRA) small business loans to study the effects of access to capital on small business growth in the USA at the county level. Grounded in theoretical models of imperfect financial markets and entrepreneurship dynamics, we use a panel of 3050 counties over the 1996–2010 period and find that, in general, CRA loans have a statistically significant positive effect on small business growth for the full sample of 3050 counties. This effect holds for different estimation techniques and robustness checks. More importantly, the results hold when we correct for the endogeneity of the CRA loans. The results also hold when the counties are classified into urban, rural, and low and moderate income.

Purpose This study aims to identify factors influencing the bank failure rate in the USA over the period from 1970 to 2014 with an emphasis on economic/financial factors on the one hand and on banking legislation on the other hand. Regarding the latter, this study empirically investigates four major banking statutes: the Community Reinvestment Act of 1977; the Depository Institutions Deregulation and Monetary Control Act of 1980; the Federal Deposit Insurance Corporation Improvement Act of 1991; and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. After adopting the technique of generalized method of moments (GMM), a robustness check in the form of autoregressive conditional heteroskedasticity (ARCH) is undertaken. Overall, the estimations imply that the bank failure rate was a decreasing function of the percentage growth rate of real gross domestic product (GDP) and the real interest rate yields on both three-month US Treasury bills and 30-year fixed-rate mortgages and an increasing function of the real cost of funds. In addition, there is strong evidence that the bank failure rate was increased by provisions in the Community Reinvestment Act of 1977 and the Depository Institutions Deregulation and Monetary Control Act of 1980, whereas the bank failure rate was decreased as a result of provisions in the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Finally, there also is evidence that higher federal budget deficits elevated the bank failure rate. Design/methodology/approach After modeling the bank failure rate as a function of financial/economic variables and banking legislation, the times series from 1970 to 2014 is estimated by GMM and then by the ARCH techniques. Findings The results of the GMM and ARCH estimations imply that the bank failure rate in the US was a decreasing function of the percentage growth rate of real GDP as well as the real interest rate yields on both three-month US Treasury bills and 30-year fixed-rate mortgages and an increasing function of the real cost of funds. Furthermore, there is strong empirical support indicating that the bank failure rate was elevated by various provisions in the Community Reinvestment Act of 1977 and in the Depository Institutions Deregulation and Monetary Control Act of 1980, while the bank failure rate was reduced by certain provisions in the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. There also is evidence that higher federal budget deficits increased the bank failure rate. Originality/value This study is the most contemporary (1970-2014) analysis of potential causes of the bank failure rate in the USA. The study also may be the first to apply the GMM and GARCH models to the problem. Also, some interesting policy implications are provided in the Conclusion.

This article examines the democratic contribution of nonprofit organizations to governance arrangements. Conceptualizations of governance focus on the multisector arrangements between public, for-profit, and nonprofit organizations that emerge to create public value. Nonprofit organizations have been found to contribute efficiency and effectiveness to these arrangements; however, less is understood about the democratic contribution nonprofits make. It is hypothesized that nonprofits contribute democratic value when they pursue the public interest in accordance with their civil society function. A binary logistic regression analysis is performed on negotiated Community Reinvestment Act agreements from 2000 to 2009 to predict the types of nonprofits that participate in agreements. The results show that nonprofits involved in agreements represent the public interest, as measured by their organizational purpose, representation in communities of need, and organizational capacity. The article suggests that the ...

Fragile by Design by Charles W. Calomiris and Stephen H. Haber introduces a framework for understanding financial crises and credit abundance with politics at its center. Using the historical experiences of five nations to illustrate, the authors propose that democracies such as the United States and Canada can have stable banks and ample credit so long as populist forces do not dominate the policy agenda, and that strong autocratic states such as Mexico can also achieve stability at the cost of restricting credit. Weak autocracies, such as Brazil over much of its history, often require inflationary finance and suffer from the banking fragility that comes with it. The authors identify populist ideologies and related policy decisions (such as unit banking, deposit insurance, and the Community Reinvestment Act) as underlying causes of banking instability in the United States as typified by the recent subprime crisis. Canada, in contrast, by holding populist forces in check through calculated political choices, remains crisis-free. (JEL D72, E44, G01, G21, N20, O16, O17)

Purpose – The purpose of this paper is to examine whether the underserved area requirements for Fannie Mae and Freddie Mac (the government-sponsored enterprises [GSEs]) and the community needs requirements of the Community Reinvestment Act (CRA) contributed to the house price run-up in the USA. Design/methodology/approach – This paper predicts the incidence of “Rebounds”, which indicate that a mortgage had been previously denied, to provide evidence on whether certain regulations caused excessively risky mortgage originations. As a different lender rejected the loan given the interest rate that they were willing to charge and information on the borrower, a higher incidence of Rebounds provides evidence that lenders were more frequently disagreeing about loans. This can indicate differences in regulatory pressure or oversight across lenders. Findings – This paper provides evidence that the GSEs were purchasing fewer Rebounds directly from lenders. However, evidence suggests that indirectly, the securitization market served as a conduit for Rebounds to the GSEs that needed to satisfy regulatory underserved area requirements. The necessity of complying with the CRA was found to increase Rebounds. Among regulators, the Federal Reserve was found to have been particularly associated with Rebounds. Originality/value – The paper’s contribution comes from linking Rebounds to legislative and regulatory influences. This contributes to the literature on excess credit and fraud, as well as the effect of underserved area requirements and the CRA. Also, this paper adds a new dimension to the literature on securitization, by showing the influence of regulation on the securitization of risky mortgages.

We use a regression discontinuity approach and present new institutional evidence to investigate whether affordable housing policies influenced the market for securitized subprime mortgages. We use merged loan-level data on nonprime mortgages with individual- and neighborhood-level data for California and Florida. We find no evidence that lenders increased subprime originations or altered loan pricing around the discrete eligibility cutoffs for the Government-Sponsored Enterprises' (GSEs) affordable housing goals or the Community Reinvestment Act. Although we find evidence that the GSEs bought significant quantities of subprime securities, our results indicate that these purchases were not directly related to affordable housing mandates.

The 1977 Community Reinvestment Act (CRA) established a bold agenda requiring financial institutions in the USA to serve the credit needs of low- and moderate-income areas, including traditionally excluded minority residential areas. Initially opposed by both bankers and the federal regulatory authorities responsible for enforcement, the CRA has been contentious for decades. This study explores CRA impacts by investigating whether small businesses located in minority neighbourhoods have the same degree of bank-loan access as equally creditworthy firms located in other environs. We analysed both the unmet credit needs of small firms and the outcomes of their loan applications. We found that equality in loan access has been attained in some respects, indicating the CRA has had positive effects on loan availability. Inequality nonetheless persists. Regarding unmet credit needs, firms are penalised if their owners are African American, Latino or Asian American. Since roughly half of owners in minority communities are minorities, our challenge was to disentangle the effects on loan access of small-business geographic location versus owner race. Causal factors underlying our findings were investigated. Did bank regulators take the initiative in lessening traditional discriminatory lending practices? Alternatively, were activist community groups responsible? While the agenda advocated by activist groups coincides closely with actual gains, the overlapping but differing stated objectives of regulators did not.

The Community Reinvestment Act (CRA) encourages bank lending in low- and moderateincome areas. We use a regression discontinuity design that exploits a relative income threshold that distinguishes CRA eligible from CRA ineligible neighborhoods (census tracts) and find little evidence that CRA has contributed to neighborhood changes associated with gentrification in eligible areas. Over the 1989 to 1999 period, we find that CRA eligible tracts had greater increases in mean income relative to ineligible tracts, but we find little evidence that the CRA caused decreases in the proportion of long-term residents, or increases in the proportion of white residents or college educated residents.

Using archival data and oral histories, this paper describes the community reinvestment movement in Washington, DC from 1970 until 1995. Though the movement began as isolated private advocacy in the early 1970s, it helped pass key pieces of federal legislation, such as the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA). The DC government responded to both redlining and gentrification with a suite of community development legislation designed to extend credit based on social needs, to increase homeownership via a homestead housing program, and to mitigate displacement due to gentrification with tenant right-to-purchase legislation. Additionally, DC's reinvestment movement is unusual in that the city government used an interstate banking law to force reinvestment in the 1980s and early 1990s. Furthermore, the paper describes class-based barriers to reinvestment within the African American community including petty corruption amongst mortgage bankers and real estate brokers, corruption that foreshadowed exploitation during the sub-prime era. The paper concludes with a discussion of how the DC reinvestment movement took advantage of political opportunity structure, using advocacy and research to effect reinvestment because of successful venue-shopping. This work fills specific gaps in the literature, to include DC's role in the writing of CRA and HMDA, qualitative evidence of the effects of redlining, the use of interstate banking laws for reinvestment, and class issues within the African American community in the context of reinvestment.

Until the onset of the financial meltdown, independent mortgage companies (IMCs) had begun to originate an increasing share of subprime loans, a high proportion of which went into foreclosure. In this study, we compare and contrast the characteristics of neighborhoods that have high proportions of loans made by Community Reinvestment Act (CRA)-regulated institutions with those that have high proportions made by IMCs. We find that IMC-dominated neighborhoods are characterized by high proportions of Blacks/African-Americans, low average family incomes and low nominal average family income increases, an old housing stock with inexpensive homes, a low homeownership rate, high vacancy rates, and a high proportion of high-cost loans. Based on t-tests and regression analyses, we find that areas dominated by IMCs are different from neighborhoods dominated by CRA Lenders and that the proportion of people of color helps explain foreclosure rates.

This paper studies the role of the Community Reinvestment Act (CRA) in the recent US housing boom-bust cycle. Using a difference-in-differences matching estimation, I find that the enhancement of CRA enforcement in 1998 caused a 7.7 percentage points increase in annual growth rate of mortgage lending by CRA-regulated banks to CRA-eligible census tracts relative to a group of similar-income CRA-ineligible census tracts within the same state. Financial institutions which are not subject to the CRA, however, do not show any change in their mortgage supply between these two types of census tracts after 1998. I take advantage of this exogenous shift in mortgage supply within an instrumental variable framework to identify the causal effect of mortgage supply on housing prices. I find that every 1 percentage point higher annual growth rate of mortgage supply leads to 0.3 percentage points higher annual growth rate of housing prices. Reduced form regressions show that CRA-eligible neighborhoods experienced higher house price growth during the boom and sharper decline during the bust period. I use placebo tests to confirm that this effect is in fact channeled through the shift in mortgage supply by CRA-regulated banks and not by unobserved demand factors. Furthermore, my results indicate that CRA-induced mortgages went to borrowers with lower FICO scores, carried higher interest rates, and encountered more frequent delinquencies.

A number of studies have shown that, as a result of the ambiguity of US legal mandates, organizations have considerable latitude in how they comply with regulations. In this paper, we address how the different agendas of the federal and state governments increase ambiguities in state-firm relations and how states are interested actors in creating opportunities for firms to navigate the federal legislation. We analyze the institutional forces behind bank acquisitions within and across state lines in order to illuminate the ways that US states take advantage of federal ambiguity and are able to shape corporate practices to their benefit. We specifically examine how patterns of bank acquisitions are shaped by the crucial relationship between the federal Community Reinvestment Act (CRA) and a little-understood provision in the federal tax code that is implemented at the state level, the Low-Income Housing Tax Credit (LIHTC). The relationship is complex because, while the federal government uses the CRA to control bank acquisition activity, states promote use of the LIHTC, through which banks can address federal CRA concerns, and thereby promote bank acquisitions in their jurisdictions. Thus, our findings suggest that the implementation of social legislation at one level in a federal regulatory system undermines the mechanisms of social legislation at another level. We use archival research and in-depth interviews to examine the interaction between these institutional processes and formulate hypotheses that predict the ways in which bank acquisitions are constrained by banks’ CRA ratings and the way states in turn help banks overcome their CRA constraints. Quantitative analyses of all bank acquisitions in the United States from 1990–2000 largely support these hypotheses.

Objectives. This article examines the effect of community organizing on the likelihood that minority borrowers pursue home mortgage credit from regulated lenders. Methods. Governance perspectives suggest that community organizations exert significant influence on policy outcomes. We use logistic regression with interaction terms to test the effect of community organizing on the lending outcomes of minority borrowers. We use a matched control sample of cities, drawing on 2004 loan data from two midwestern cities similar in racial and economic composition but with different histories of organizing around the Community Reinvestment Act (CRA). Results. We find differential effects based on an applicant's race or ethnicity. Overall, African-American applicants are less likely to pursue mortgage credit for home ownership from regulated lenders than their white, non-Hispanic counterparts. However, African Americans seeking mortgage credit in a city with a history of CRA organizing are more likely to apply to regulated lenders than their racial counterparts in a city without CRA organizing. However, while organizing reduces the disparities between white and African-American applicants, a gap still remains. Conclusion. African-American borrowers living in cities with a history of community organizing around CRA appear more likely to pursue mortgage credit from traditional, regulated lenders, suggesting that governance matters.

Bank solvency questions and bank failures in the U.S. have become issues of renewed concern in recent years. Given the significance of bank solvency and bank failures for the health and stability of the U.S. economy, it is imperative to have insights into those factors that systematically influence bank failures. Accordingly, this empirical study seeks to identify those factors influencing the bank failure rate in the U.S. over the period 1970 through 2008, with emphasis on: (1) recent major banking statutes, including: the Community Reinvestment Act of 1977, CRA, the Federal Deposit Insurance Corporation Improvement Act of 1991, FDICIA, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, RNIBA, and the Gramm-Leach-Bliley Act, GLB Act; (2) the health of the housing market; and (3) general economic and financial market conditions. The GARCH estimates indicate that FDICIA acted to reduce bank failures, whereas (presumably by increasing competition and/or increasing costs through branch bank expansion) RNIBA induced a net increase in bank failures in the U.S. The GARCH evidence implies that the CRA also led to increased bank failures in the U.S., arguably by exposing banks to greater credit risk. The evidence also indicates that the GLB Act may also have acted to induce more bank failures. Furthermore, a stronger housing market was found to reduce bank failures, whereas a stronger economy as well as more favorable interest rate conditions reduced bank failures.

As the mortgage crisis took shape by 2007, the Community Reinvestment Act of 1977 emerged at the center of a debate over whether community reinvestment regulations were perverse incentives promoting high-risk lending, or whether those regulations had become outmoded in the face of concentrated subprime lending. This paper weighs those arguments by examining the market behavior of lenders subjected to Community Reinvestment Act (CRA) as the subprime lending boom took shape after 2004. Using Detroit as an illustrative case, it empirically examines the market structure of high-cost lending, as well as the role played by CRA-covered lenders in the critical market segments most prone to concentrated subprime lending. The results suggest that several “blind spots” in CRA regulations weakened the Act's ability to counter the firm- and neighborhood-level segmentation that characterized the growth of concentrated subprime lending in Detroit during the peak years of the housing boom.

In the wake of the 2008 global financial crisis, the Community Reinvestment Act (CRA) of 1977 has probably received more media attention in the past 2 years than it garnered cumulatively over the previous 30 years. Numerous conservative pundits and commentators have blamed the CRA for the subprime crisis and the subsequent worldwide financial meltdown. Most social workers are probably unaware that the CRA is probably responsible for more investment, loans, and wealth creation in low and moderate income neighborhoods than any other single piece of federal legislation over the past 40 years. This article highlights the following features about the CRA that social workers need to know: The CRA was created and passed only because of grassroots community organizing; the CRA has been directly or indirectly related to 8 trillion dollars of investments, mortgage, and small business loans in low income neighborhoods since 1977; community organizing has always been the primary enforcement mechanism of the CRA; cont...

We analyze residential mortgage lending by banks in periods surrounding upgrades or downgrades in their ratings under the Community Reinvestment Act (CRA). Empirical results indicate that upgraded banks had higher relative levels of lending than did downgraded banks prior to ratings changes. Additionally, both downgraded and upgraded banks increased lending following implementation of reforms to the CRA in the 1990s, which were intended to more closely align rating assessment with lending outcomes. Little support is provided, on the other hand, for a hypothesis that banks respond to downgrades by increasing lending (despite apparent incentives for them to do so).

Purpose – The purpose of this paper is to determine whether lending qualifying for credit under the Community Reinvestment Act (CRA) is associated with how broadly banks define the assessment areas (AAs) within which they operate. Both are identified as components of performance for purposes of compliance with the CRA.Design/methodology/approach – Regression analysis using a sample of 212 banks, observed in 2006.Findings – Qualifying lending and AA lending are found to be unrelated. This is inconsistent with an ability of banks to gerrymander their AAs in order to tradeoff one regulatory standard against another.Practical implications – Subjectivity inherent in AA delineation does not necessarily mitigate the achievement of regulatory objectives on qualifying lending. This is relevant to the ongoing debate concerning the role of flexibility in financial regulation.Originality/value – This is believed to be the first empirical study on bank‐specific factors associated with AA lending under the CRA.

PurposeThe purpose of this paper is to discuss the key regulatory, market, and political failures that led to the 2008‐2009 US financial crisis and to suggest appropriate recommendations for reform.Design/methodology/approachThe approach is to examine the underlying incentives that led to the crisis and to provide supporting data to support the hypotheses.FindingsWhile Congress was fixing the savings and loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was using government sponsored enterprise (GSE) resources and the resources of narrow constituencies for their own advantage at the expense of the public interest. Second, in the mid‐1990s, to encourage home ownership, the Administration changed enforcement of the Community Reinvestment Act, effectively requiring banks to use flexible and innovative methods to lower bank mortgage standards to underserved areas. Crucially, this disarmed regulators and the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies, and asset managers were all plagued by problems such as moral hazard or conflicts of interest.Originality/valueThe paper focuses on the political economy reasons for why Congress and US administrations provided these perverse incentives to the GSEs and banks to lower mortgage standards. It also proposes some innovative methods of improving bank regulation that address the regulatory capture problem.

Economic growth in the United States has historically bypassed many minorities and low-income communities. Some researchers and community advocates assert that the deterioration of these communities is in part caused by financial institutions' redlining and neglect. To rectify the situation, the government introduced the Community Reinvestment Act (CRA) for the purpose of encouraging banks and saving institutions to become more socially responsible and help meet the credit needs of communities in which they are located. The CRA was the government's response to bank lending discrimination. However, when passing the Act, Congress was equally concerned with reversing or at least halting disinvestment from inner-city communities and in turn revitalizing local economies. Many believe that the availability of credit to establish, refinance, and improve small businesses is critical to the well-being of local communities. Therefore, through the provision of small business loans, the CRA could be envisioned as a catalyst toward achieving that goal. Thus the aim of this paper is to investigate potential relationship between banks' CRA lending activities, and new business start-ups and economic growth in local markets. The paper proposes that new start-ups will have spillover effects that will consequently contribute to community development. After controlling for several potential variables that could have an impact on business start-ups and community developments, the study found a strong positive effect. Beside its social and economic implications, the study also considered policy implications associated with the CRA regulation as a welfare improving initiative in low-income communities. It offers ground for certain government intervention in the loan market. Introduction Many communities in the United States have been plagued with chronic poverty, unemployment, unskilled labor force, high crime rate, and poor infrastructure (Somaya 1996). Their lagging development has had an adverse effect on economic growth (Matasar and Pavelka 2004). Many believe, however, that corporations can play a revitalizing role especially in inner-city communities where exist the greatest concentration of social problems and the greatest proximity to the corporate sector (Porter 1995). One industry that has historically been associated with creating or exacerbating some of these problems is the banking industry (Matasar and Pavelka 2004). Some researchers and community advocates assert that the deterioration of inner cities is in part caused by banks neglecting their local and low-income communities (Canner and Passmore 1995a). In 1977, motivated by mounting concerns and perceived shortfalls in banks' investment in inner-city communities, the government introduced the Community Reinvestment Act (CRA). The Act required all federally regulated banks to demonstrate that they served the convenience and credit needs of their entire communities, including low and moderate-income neighborhoods and minority customers (Johnson and Sarkar 1996). Since its introduction, the CRA has attracted many opponents who criticize it by arguing that it forces banks to engage in unprofitable and unsafe investment practices in order to gain favorable regulatory evaluation (Lacy and Walter 2002; Macey and Miller 1993). However, it has also attracted many supporters who defend it by arguing that the shortage of capital in inner-city neighborhoods is a major stumbling block for any investment activities and cite "redlining" (1) by banks and financial institutions as a significant factor (Etsy 1995; Porter 1995). These supporters consider the CRA a necessary regulation in order to influence banks' services and investment in deteriorating inner-city communities. The above debate about the CRA has been ongoing for the last 30 years. It has been sustained by the differences of opinions regarding the costs and benefits of the regulation (Barr 2005) and exacerbated by the lack of empirical research evaluating its impact (Hylton 2000). …

In light of the blurring between sectors, it is critical not only to understand public organizations, but also to identify factors that contribute to the achievement of public outcomes across sectors. To what extent does organizational “publicness” lend insight to understanding and managing for public outcomes? By integrating the theory of dimensional publicness with recent work on public values, this analysis presents a framework that defines realized publicness as public outcomes predicted in part by institutions embodying public values. Based on insights from neo-institutional theory, managing for public outcomes, or managing publicness, requires attention to the combined effects of regulative, associative, and cultural-cognitive public value institutions. This analysis concludes with a timely application of the realized publicness framework to mortgage lending, demonstrating the importance of conceptualizing influences from diverse types of public value institutions when evaluating a particular initiative, such as the Community Reinvestment Act, and mortgage outcomes.

The underlying cause of the financial meltdown was much more mundane than a “crisis of capitalism”: The real origins lay in mostly obscure housing, tax, and regulatory policies of the U.S. government. The Community Reinvestment Act, the affordable‐housing “mission” of Fannie Mae and Freddie Mac, penalty‐free refinancing of home loans, penalty‐free defaults on home loans, tax preferences for home‐equity borrowing, and reduced capital requirements for banks that held mortgages and mortgage‐backed securities combined with each other to create the incentives for both subprime lending and the housing bubble that eventually led to the financial collapse.

Banks are considered key actors in affordable housing and community development in the United States. Their involvement in such activities may be due partly to their dependence on economic rents generated from development. In the United States, however, banks are encouraged to support such activities by the federal 1977 Community Reinvestment Act (CRA). I examine how dif- ferent factors explain the CRA-qualified investments by banks. Qualified investments are essentially nondebt financial resources provided as an equity investment or grant with a community development purpose. I find that the identity of the regulator (the United States has four banking regulators) has a major impact on the level of qualified investments. Other things equal, a difference in regulators can cause a bank's qualified investments to more than double. Besides suggesting that some regulators may be enforcing a major portion of CRA regulations more vigorously than others, this also suggests that the CRA plays a major role in bank investment in community development. This has policy implications not just in the United States but also in other countries that might consider replicating the CRA.

PurposeThis paper aims to estimate the cost to US savings banks and savings and loan institutions with assets under $250 million of complying with the anti‐redlining Community Reinvestment Act (CRA).Design/methodology/approachCompliance cost is modeled as a type of inefficiency because the lending institution is required to favor higher cost borrowers whom it might otherwise choose to avoid. Inefficiency is estimated using a special form of regression with a two‐part error term that contains an inefficiency parameter.FindingsThe 1995 statutory changes designed to lessen the cost of CRA compliance are apparently more than offset by the increased enforcement efforts of the Clinton Administration, which was hostile to deregulation enacted by Congress. For the vast majority of small thrifts, annual compliance costs grew by $251,000 following “deregulation,” and for a small number of “Outstanding” (in meeting the goals of the Act) institutions, CRA‐related costs grew by $539,000. These increases represent a rise of about 3.5 and 6 percent of operating expenses, respectively.Practical implicationsGiven the wide latitude afforded financial regulators in the USA legislative changes regarded as “deregulation” also require a sympathetic and supportive administration to be realized.Originality/valueThe paper offers insights into how increased enforcement can offset statutory deregulation, focusing on the case of the Community Reinvestment Act.

Banks and thrifts are major actors in the affordable housing and community development arenas. They are often relied on to invest in low‐income housing tax credits and other projects as well as provide operating support. Banks and thrifts are explicitly encouraged to invest in such activities by the Community Reinvestment Act's (CRA's) Investment Test. Regulations require examiners to consider both quantitative and qualitative criteria in determining a large bank's Investment Test rating. The qualitative criteria are particularly important for organizations seeking investments for projects that are more innovative or complex or that offer less than stellar financial returns. An analysis of CRA performance evaluations reveals that, of the two qualitative criteria, only responsiveness to needs has a significant impact on Investment Test scores. Moreover, controlling for investment activity leads to higher Investment Test scores for larger banks. Implications for CRA policy and implementation are di...

This study reviews selected issues related to the role that black-owned banks can play in contributing to the economic development of low-income, minority communities. Given their paucity in numbers, their lack of size, and their financial weaknesses, they have yet to demonstrate that they can serve as an important engine of growth for their communities. Also, for over 150 years, it has been argued that black-owned banks are needed because of discrimination by financial institutions against black customers. Various studies give conflicting results, but so far there is no conclusive evidence that lending discrimination exists. To encourage bank lending to low-income communities, the Community Reinvestment Act was enacted. Some black-owned banks however, have complained that the Act encourages unfair competition from other banks for the same loan customers. Hence, the case for an essential role for black-owned banks has yet to be made decisively. Evidence, however, suggests that their profitability and efficiency improves with time. Hence, in the future, with greater experience, black-owned banks may play a more important role in their communities.

One response to the incentives provided by the Community Reinvestment Act of 1977 (CRA) has been for lenders and community groups to enter into CRA agreements, which involve pledges to provide prescribed levels of service to targeted neighborhoods. This article examines whether lenders actually change their behavior after entering into these agreements. Using data on CRA agreements and on mortgage lending, we find that institutions increase their lending activity with each year an agreement is in force and that increased lending persists after an agreement expires. Additional analysis shows that agreements that include provisions for mortgage counseling and technical assistance are associated with increased targeted lending. By contrast, agreements with provisions requiring small business counseling and technical assistance and periodic meetings by review committees are associated with somewhat depressed lending levels. Further research is needed to draw definitive implications from this second s...

A number of researchers have recently questioned whether the Community Reinvestment Act (CRA) is still needed. In addition, economic analysis has explored the efficiency of many regulations, but not the CRA. This article seeks to address both issues to shed light on the necessity and efficiency of the CRA. On the basis of data from a survey on the performance and profitability of CRA-related lending activities, we reach three main conclusions. First, consistent with the view that the CRA is needed, we find evidence that the majority of surveyed institutions engaged in some lending activities that they would not otherwise have done in the absence of the law. Second, in terms of efficiency, the results are mixed: The vast majority of institutions increased credit flows profitably, but a significant minority incurred costs, albeit small ones. Third, quantitative evidence suggests that marginal CRA-related lending tended to be small.

I Introduction AFTER A BRIEF RECESSION IN THE EARLY 1990s, the United States experienced a period of economic growth that, until recently, seemed unlimited. One of the apparent manifestations of prosperity in the economy has been the increase in home ownership over the last decade. According to a study using Current Population Survey (CPS) data, home ownership among U.S. families increased from 60.6% in 1989 to 62.6% in 1998. Both absolute and relative home ownership rates rose for black and Hispanic families over the same period, although in 1998 the home ownership rate for white families remained 50% higher than that for minorities. Home ownership rates were higher in 1998 than 1989 for families in each quintile of income distribution, although the amount of increase differs across groups (Bostic and Surette 2000). On the other hand (as any good economist would say), it is easy to obscure the bigger picture by focusing on such a narrow span of time. In the 30 years prior to the 1970s, home ownership rates increased by over 20 percentage points (Segal and Sullivan 1998). The increase in home ownership over the last few years followed two decades of stagnant or falling rates of home ownership. According to data from the American Housing Survey (AHS), the proportion of households owning the home in which they reside was 67.4% in 1975, dropped to 65.1% in 1985, and recovered to 66.1% by 1997 (Orr and Peach 1999). The high inflation and interest rate instability of the 1970s exacerbated institutionalized constraints to home ownership for many households, and rates of home ownership fell during the period. But the 1970s also witnessed attempts to break down the racial barriers to economic opportunity and home ownership. The civil rights movement drew attention to problems of discrimination and redlining in mortgage lending. In response to pressure from civil rights advocates, Congress passed the Home Mortgage Disclosure Act (HMDA) in 1975, and the Community Reinvestment Act (CRA) in 1977. Recent revisions to CRA, the role of CRA ratings in bank merger decisions, and more enforcement created incentives for banking institutions to develop special lending programs and marketing to CRA target groups (Avery et al. 2000). In addition, technological changes driving the development of secondary mortgage markets and innovations in mortgage lending coupled with a booming economy with little inflation and low interest rates are credited with a significant role in the rising home ownership rates over the 1990s. Even though the gap in home ownership between white and nonwhite households remains, the good news is that, overall, home ownership seems to be more accessible to demographic groups previously excluded from the housing market. But there is a dimension to the discussions of home ownership that seems to be missing from the literature: the effect of changing job structures on home ownership. Prior to the current expansion, rigid labor markets and implicit job security deriving in part from nonmarket institutions broke down as market forces drove the move to a more flexible labor market (Abraham and Houseman 1993; Kinnear 1999; Golden and Applebaum 1992; Gordon 1996). Businesses increasingly used nonstandard and part-time workers to gain flexibility at lower cost. A key result for some workers during this period of structural change was decreased job tenure and employment uncertainty (Gordon 1996), which carry not only short-term consequences (Belman and Golden 2000; Polivka, Cohany, and Hippie 2000; Wiens-Tuers 1998) but long-term consequences as well (Ferber and Waldfogel 1998). Has employment and income uncertainty associated with some types of nonstandard employment, especially temporary work, impacted home ownership for households even during a general expansion of the economy and generally more accessible credit? In order to understand why this question is important, the first thing to consider is what home ownership represents. …

The relatively strong functioning of capital markets at the national level challenges the efficacy of microfinance programmes in the USA. Despite this, these programmes have enjoyed considerable appeal in the USA. Whether or not there is widespread failure of traditional lending practices to impact small business is therefore an important question. This research uses the recently released Community Reinvestment Act (CRA) data on county-level loans to small businesses to model the impact of traditional loan activities on small business. A standard augmented neoclassical growth model with spatial autocorrelation term is employed to evaluate the impact of lending in West Virginia from 1996–98. Among the key findings of this research is that traditional small business loan activity does not affect the share of employment in micro enterprise (firms with fewer than five employees). Loans of less than $100,000 do affect the employment share of firms with between five and nine employees. These results imply that traditional lending practices are not affecting entrepreneurs and micro enterprise. This suggests that non-traditional lending practices may be needed to satisfy lending needs of firms in this category.

Objective. Recent trends in urban research emphasize the importance of local nonprofits and social capital in the revitalization of poor and minority neighborhoods. This article tests the idea that urban communities able to mobilize themselves by establishing development nonprofits and overcoming collective action problems will be better able to make use of urban-development policies. Methods. Measures operationalizing nonprofit presence and social capital are used in an empirical test to see if they can, through the medium of the Community Reinvestment Act, increase the number of mortgage and business loans in Washington, D.C. Results. These variables show only weak effects on mortgage lending, but very strong results for small-business lending in all types of communities. Conclusions. The results suggest that nonprofits and social capital may have only limited benefit in the revitalization of urban neighborhoods and researchers and practitioners should be careful when relying on them.

The paper compares British and US government policy initiatives to combat financial exclusion and promote community reinvestment. Financial exclusion, a general term for those who lack financial products, is concentrated in a small number of deprived urban areas in larger cities that are also starved of private sector investment. British policies, though they have drawn on US experience, predominantly treat exclusion as an individual problem and pay insufficient attention to the wider interconnections between people and place that underlie financial exclusion. These are more prominent in the Community Reinvestment Act (CRA) that has led to significant improvements in financial inclusion and community investment in the USA. The CRA is underpinned by a more compartmentalised and locally embedded system of financial regulation. Consolidation in the banking sector and the growth of competition between banks and other financial institutions in an increasingly integrated US financial sector threaten this. British policies seek to provide ‘joined-up’ solutions to financial exclusion in a manner that is more in tune with an integrated financial sector where a small number of large banks compete on a level playing field with other financial institutions. The paper highlights the difficulties that these policies face in enlisting the cooperation of financial institutions.

This article considers the broader impact of Community Reinvestment Act (CRA) agreements—bank pledges to extend a certain volume of lending to targeted groups and communities—by examining whether they are associated with changes in lending to lower–income and minority communities in the markets where they are initiated. We find the number of newly initiated CRA agreements in a county to be associated with significant increases in CRA, minority and overall conventional mortgage lending in a county over a three–year period. The results are consistent with the view that the increases in lending represent new lending, with some evidence suggesting that the increases in lending are relatively short–lived. Overall, the results are consistent with the notion that lenders view CRA agreements as a form of insurance against the potentially large and unknown costs associated with fair lending violations, poor CRA performance ratings and adverse publicity from CRA–related protests of mergers or other applications. The results are also consistent with the view that the effectiveness of CRA agreements in increasing lending activity is ultimately determined by the persistence and sophistication of community groups in monitoring compliance with CRA agreements.

In this paper, I use recently collected Community Reinvestment Act loan data to examine how small business lending in local geographic areas (defined as markets) by lenders not physically located in those areas changed between 1996 and 2001. The results show that the importance of “outside lending” increased substantially over this period when measured in terms of the number of loans rather than the dollar volume of loans. The levels and rates of growth in out-of-market lending are more modest if the share of out-of-market lending is expressed in dollar volumes and almost insubstantial if organizations that engage in substantial credit card lending are excluded as out-of-market lenders. Using a fixed-effects model and an extensive panel data set, I find that the share of outside lending into local geographic markets is positively associated with local market concentration and the average wage of tellers in the market, consistent with the hypothesis that outside loans are to some degree substitutes for in-market loans.

In May 1995 the Federal Banking Agencies adopted major reforms to the implementation of the Community Reinvestment Act (CRA) to make the examination process more objective and performance-based, promote consistency, and reduce regulatory burden. This study presents tests of excess stock returns around key events in the reform process and examines whether the patterns of returns were affected by financial institution type and size. While we find that portfolios of banks and thrifts recorded statistically significant excess returns for certain events, the cumulative response was mostly statistically insignificant. A policy implication of our findings is that the potential for further improvement in the administration of CRA requirements still existed following the 1995 reform efforts.

I. INTRODUCTION Financial problems often pose a dilemma regarding the appropriate nature and timing of any regulatory response. Banks and the financial intermediation services they perform generally are viewed as crucial to economic growth, and the intermediary role of banks entails potential negative economic consequences of reducing permissible lending activities in response to an adverse financial shock, as in Bernanke and Gertler (1987). Equally well known, however, are the perverse incentives associated with allowing thinly capitalized banks to operate with federally guaranteed deposits, as in Kaufman (1987). To the extent both views are correct, they point to a potential trade-off between enhancing the supply of bank credit and promoting safe and sound banking practices in periods of financial difficulty. Although this type of trade-off has been debated and clarified in the context of banking crises, its implications for banking regulation more generally are underappreciated. In particular, limited attention has been given to the potential trade-off between the general credit enhancement objective of the Community Reinvestment Act (CRA) and the risk-constraining objectives of safety and soundness standards. In October 1977, the U.S. Congress passed the CRA as Title VIII of the Housing and Community Development Act. The legislation is designed to encourage commercial banks and savings associations to help meet the credit needs of their communities, in a manner consistent with safe and sound banking practices. The CRA is often associated with the specific objective of enhancing the availability of credit for low-income neighborhoods in a bank's service area. However, the implementing regulations, in accordance with the general nature of the statute, also prominently feature general guidelines related to the total volume of lending activity conducted in an institution's market area, irrespective of neighborhood income levels. At its most fundamental level, the CRA is concerned with the credit needs of the communities in which banks are chartered; that is, federal regulators are to use their supervisory authority to encourage institutions to help meet local credit needs, as in Garwood and Smith (1993). Since July 1 990, CRA ratings have had four levels: 1--outstanding; 2--satisfactory; 3--needs to improve; and 4--substantial noncompliance (55 FR 18163). The CRA's specific and general credit enhancement objectives are qualified by reference to safe and sound banking practices, but the possibility nevertheless arises that favorable CRA ratings might reflect aggressive financial strategies designed to support an expansion of lending activity. In contrast, bank regulators use very different criteria in assigning safety and soundness ratings. In 1979, federal agencies adopted the Uniform Financial Institutions Rating System. The resulting overall, or composite, safety and soundness ratings originally were derived from the onsite evaluation and rating of five separate factors--capital adequacy (C), asset quality (A), management (M), earnings (E), and liquidity (L). This CAMEL rating system was amended on 1 January 1997, to include a sixth component (61 FR 67021). The new S component focuses on sensitivity to market risk, such as the risk arising from changes in interest rates. Like the earlier CAMEL rating, the CAMELS overall rating has five levels: 1--basically sound in every respect; 2--fundamentally sound but with modest weaknesses; 3--financial, operational, or compliance weaknesses that cause supervisory concern; 4--serious financial weaknesses that could impair future viability; and 5--critical financial weaknesses that render the probability of near-term failure extremely high. For simplicity, this study applies the term CAMEL to both CAMEL and CAMELS ratings. In contrast to CRA ratings, the CAMEL rating system clearly is directed at containing risk. Given the opposing perspectives on bank credit underlying CRA and safety and soundness ratings, in addition to the bank-level costs associated with CRA compliance efforts, current regulatory policies entail a potential conflict. …

This study investigates factors affecting changes in the disparity of home mortgage denial rates between white and minority loan applicants in the U.S. during the period 1991–1997. We develop a two-stage least-squares regression model that incorporates applicant-level characteristics, neighborhood characteristics, regional economic data, and bank-specific data as explanatory variables. Some have argued that mortgage lenders were under increasing pressure from industry regulators to extend additional credit to minorities and low-income groups during the period under study. The model includes each institution's periodic CRA rating as a proxy for regulatory influence. An alternative explanation is that market forces, such as improvements in economic conditions and in bank financial condition and performance, affected default loss estimates and credit standards in a way that disproportionally benefited minority and low-income applicants. The empirical findings are consistent with the latter hypothesis. We conclude that policy makers should consider the impact of market factors when assessing the allocation of mortgage credit in a particular demographic market. The findings also underscore the importance of controlling for lender assessments of credit risk when evaluating compliance with CRA and fair lending statutes.

Homeownership among U.S. families increased notably in recent years, from 63 percent in 1989 to 66.2 percent in 1998. This article examines this trend and the factors contributing to it. We find that (1) homeownership rose for all racial, ethnic, and income groups; (2) the differences in homeownership between minority and nonminority families and between middle-income and lower-income families declined significantly; and (3) changes in family-related characteristics explain homeownership trends among only the top two income quintiles. Among the lower two income quintiles, family-related characteristics explain almost none of the increase in homeownership. This pattern suggests that the favorable economic climate of the last decade, changes in mortgage and housing markets, and changes in the regulations governing those markets account for the increase in homeownership among lower-income families.

Metzger's analysis of the effects of the neighborhood life‐cycle theory is an interesting, yet flawed discussion of the relationship between public policy and theory. According to Metzger, Downs's theoretical model of urban dynamics had an enormous effect on decisions related to urban renewal, discriminatory lending, and other practices that had negative consequences on urban neighborhoods. Conversely, alternative urban models of neighborhood dynamics have generated positive impacts, such as the increased lending in low‐ and moderate‐income neighborhoods resulting from the Community Reinvestment Act. Metzger's analysis is flawed because he (1) never demonstrates that the neighborhood life‐cycle theory affected policy, rather than just legitimating existing ideas about urban dynamics, (2) does not accurately represent urban models developed as an alternative to ecological approaches, and (3) equates triage planning with discriminatory practices.

Traces the history of the Community Reinvestment Act (CRA), which requires US lenders to meet the credit needs of their local customers, and presents a study of its effect on profitability. Looks at financial institutions which received revized CRA ratings between 1990 and 1995, analysing their characteristics before and after revision, and finds upgraded banks hold more loans and are likely to be either rapidly growing and/or reaching deeper into the pool of applicants. Goes on to show that interest on CRA‐related loans is lower than on others, i.e. profitability is reduced and risk increased. Concludes that although CRA activities may open new markets and build new skills for lenders, their costs are likely to exceed their benefits for most institutions.

Twenty to 30 years after passage of laws designed to eliminate racial discrimination and redlining on the part of mortgage lenders questions regarding race and lending persist. Studies regularly reveal that race and location do affect lending decisions. However, few studies examine variation in approval rates by city size, the impact of location on White and Black applicants, or racial lending patterns in a given region. The present study considers these elements of lending for one major region ofthe United States, the Southeast. Examination ofmore that 600,000 mortgage applications from 15 metropolitan areas throughout the Southeast reveals sharp disparities in mortgage approval rates between Black and White applicants. For all cities in the region Whites were more likely to gain lenders' approval than Black applicants, even when controlling for income and loan amount, although there is considerable variation among cities in the degree to which Whites fare better than Blacks. The data reveal that city size affects approval rates of Blacks but not of Whites. Furthermore, Whites seeking loans of up to $100,000 in minority areas are less likely to receive them than are Blacks requesting similar loan amounts. Also, lower-income Blacks requesting small loans for houses in minority areas are more successful than lower-income Blacks requesting small loans for dwellings in White neighborhoods. The results ofthe study point to a need for greater efforts on the part ofthe lending industry to invest in minority areas and to provide Blacks with increased opportunities for home ownership and the associated process ofcapital accumulation. Passage ofthe Home Mortgage Disclosure Act (HMDA) in 1975 provided the first opportunity to examine patterns ofmortgage lending on a widespread basis. The Act and its 1989 amendments require most lenders to report a variety ofstatistics about loan applicants. These include the applicant's race, the loan amount requested, the applicant's income, the census tract in which the desired property is located, and the action taken on the application. With these data one may examine aggregate statistics related to general lending patterns in urban areas, analyze patterns based on race vis-a-vis income and loan amount requested, and study spatial variation in lending as related to poor/minority areas versus well-to-do, predominantly White areas. The issue of spatial variation is important given passage of the Community Reinvestment Act (CRA) of 1977. While the Fair Housing Act (1968) and the Equal Credit Opportunity Act ( 1974) prohibit racial discrimination by lenders, the CRA requires that lending institutions meet the credit needs of the entire community, including low-income neighborhoods. The bill was enacted because ofconcerns on

The U.S. banking industry has three federal regulators in addition to the 50 state regulators. Through choices regarding its chartering source, joining the Federal Reserve System, and having deposit insurance, a bank also selects which office or agency serves as its primary regulator. Federal regulators gain status and authority from the number of banks over which they have primary supervision. It has long been suspected, therefore, that they compete with each other to entice banks to make choices that increase the number of banks reporting to them. This competition which includes less stringent enforcement and broad interpretation of the laws as favored by the banks is known as competition in laxity. The Community Reinvestment Act (CRA) is enforced by each of the three federal banking regulators. Since 1990, their ratings of banks' CRA performance have been published. This published data provides an opportunity to test accuracy of the competition in laxity theory.

Banks and other depository institutions have signed more than 300 community reinvestment agreements valued at $350 billion in the two decades since the passage of the Community Reinvestment Act (CRA). This article examines the effectiveness of negotiating CRA agreements in Chicago, Cleveland, Pittsburgh, and New Jersey. After describing the agreements and the procedures by which they are enforced, the article looks at their impact and discusses several factors that could limit implementation of CRA agreements in the future. The findings suggest that CRA agreements are more effective in some areas than others. They seem most consistently successful in meeting their goals for mortgages, investments in low‐income housing tax credits, grant giving to community‐based organizations, and in opening (and keeping open) inner‐city bank branches. The future of CRA agreements is clouded by several factors, most notably the restructuring and consolidation of the financial service sector.

The Community Reinvestment Act (CRA) requires U.S. banks to make loans available in low- and middle-income sectors of their communities. Vaguely worded and unevenly enforced, CRA has created a major dilemma for banks because their CRA ratings are open to public scrutiny and used by regulators in determining whether to permit a bank to expand its products, services, or geo- graphic presence. Ironically, foreign banks doing business in the United States have been able to avoid the impact of CRA because of legal privileges that are now disappearing. As Depression era-banking laws are set aside so that American banks can regain their international competitiveness, foreign banks in the United States will be forced to comply with CRA to take full advantage of the new opportunities available in the American banking arena. Based on current evidence, it appears that CRA may be a major stumbling block in the path of future foreign bank expansion in the United States.